Modest Proposals For Better PILOT Programs « Smart City Memphis

To borrow Shakespeare’s words, the recent conflict and controversy about EDGE tax freezes now seem more than anything to have been sound and fury signifying nothing – or at least little to nothing.

In the end, despite committees – labeled as blue ribbon – involving city and county governments, Greater Memphis Chamber, and EDGE, nothing in the way of real reform in the local PILOT program was accomplished.

The changes that were made appear to be more about tweaks to process than the comprehensive review of policies about incentives themselves. Although EDGE is responsible for only about half of the $640 million in city and county taxes that have been waived since it was created, the debate centered on whether the incentives – now more resembling entitlements – doled out by it were falling short of propelling an economy that has languished throughout EDGE’s history.

There was a lot of tough talk about City of Memphis going its own way, about amending the 2011 joint city-county resolution creating EDGE so that its president reports to its board instead of city and county mayors, about requiring approval of PILOTs by the legislative bodies (which had delegated their power to waive taxes to EDGE), and about expanding the inquiry to the other eight agencies in Shelby County vested with the power to give companies and developers tax holidays.

Throwing Darts

But, in the end, the sound and fury delivered moderate change and more than anything ratified the working relationships on which EDGE had been established in the first place in 2011. In this way, the agreement between EDGE and the Greater Memphis Chamber is positioned as a big advancement when it truth, it was simply back to the future because it was the same relationship ratified by the organizations eight years ago.

In retrospect, it appears that the frequent and increasingly loud citizen grumbling about tax incentives was treated as mere noise and little serious reform came to the PILOT programs in all of their permutations, remembering that of the $75 million a year in city and county taxes that are waived to corporations and developers, EDGE is responsible for just slightly more than half of total amount.

It is but one of the nine public agencies that can approve agreements that allow companies to avoid paying their fair share of their taxes, but it continues a tradition of aggressive tax incentives that began decades before it was established. While it did some modest fine tuning of the program in its early years, that quickly gave way to an expansion of PILOTs into “destination retail,” apartments, hotels, and corporations which threatened (or pretended) like they were thinking of moving, most often to North Mississippi.

Much of EDGE’s work has taken place in the absence of a real economic development agenda, so it has at times felt like it was throwing as many darts at the wall as it could, resulting sometimes in tax holidays for corporations that don’t even pay a living wage for Memphis workers.

It Tax Breaks Are So Good…

While we are not one of the “never ever” anti-PILOT people, there’s not much in the performance of the Memphis and Shelby County economy in the past 12 years to suggest that the tax freezes should be treated like the magic answer to our economic success. After all, in the past decade, while all agencies with PILOT authority told corporations and developers that they did not have to pay about $750-800 million dollars in taxes, our community lost ground and were lapped by cities that used to aspire to become us.

Meanwhile, a regular talking point of politicians and economic development types here is that we are the midst of $15 billion of investment, proving conclusively that our community is on a roll. The fact that precious few of these investments in Memphis and Shelby County received PILOTs attests to the reality that tax freezes are not needed for growth and often are merely lagniappe for projects that were going to happen anyway.

In other words, we can see clearly now that giving away taxes is not the factor that produces the kind of economy, the kind of living wage jobs, and the kind of community that we all want. And yet, we soldier on with the PILOT entitlement program rather than create the agenda that can result in the economic strength that we really need. In the end, it’s an example of doing the same and expecting different results and we all know what that is the definition of.

While it is highly unlikely that the PILOT program will ever be eliminated, what if the amount of taxes being waived could be reduced by one-fourth or one-half? That would result in $20-40 million more in taxes that could be spent on vital public services. It could fund the $30 million that MATA needs to run a system comparable to our peer cities, it could be invested into the education of our students, or it could reduce the city and county property tax rate.

While many officials seem impatient when the conversation turns to the way that PILOTs have evolved from incentives into entitlements, even when the questions come from City Councilman Martavius Jones, who continues to raise the right questions about the effectiveness of the PILOT program. To his credit, he again has interested some other local legislators in taking a closer look at the tax waiver program.

Because hope springs eternal, we issue our own modest proposals for answering core questions: Who Benefits, who pays the costs, and how can they be improved:

* Memphis City Council and Shelby County Board of Commissioners should require a quarterly report that provides their members with data about each PILOT approved by the nine agencies given the authority to waive taxes. There are the basics: the amount of the tax freeze and the length of its term, but there is also other data: the cumulative amount of taxes waived and the per job cost with each PILOT.

* Memphis City Council and Shelby County Board of Commissioners should demand the median salary for every PILOT rather than the average salary that is now noted but is skewed by the higher salaries of management. The median income is a truer indicator of the actual per job salaries, but in addition, legislators should ask for a breakdown of the jobs by category and salaries for each category. Finally, each PILOT should be weighed for its impact in closing the racial income gap and reducing poverty.

* Memphis City Council and Shelby County Board of Commissioners should demand to know how much school funding is lost with each PILOT. Based on our rough calculations, the current PILOTs waive about $10 million a year that would otherwise be spent on schools. The public deserves to know the amount of incentives that are being financed by cuts in education spending and as much as anything, we need to understand how less funding for schools can in the long run result in wage losses.

* Memphis City Council and Shelby County Board of Commissioners should demand to know what percentage of the total project is comprised by the PILOT amount, and if that percentage exceeds a specified amount, say 10%, the legislative bodies’ approval should be required. Today, there are projects where PILOTs amount to 25% of the total cost.

More Checks and Balances

* Memphis City Council and Shelby County Board of Commissioners should require that its approval is needed if a project is to receive more than one tax incentive. For example, there was a time when a developer of a project was given a menu of incentives – PILOT, TIF (Tax Increment Financing), or direct city or county funding – and one of them was selected. More and more, these days, the answer is “yes, we pick all of them.” Each project should select its primary incentive, if it deserves one. If it wants more, the legislative bodies should have a voice in the decision.

* Memphis City Council and Shelby County Board of Commissioners should require a yearly report from each agency approving PILOTs about their targets and priorities for the coming year, and it should be followed yearly by an annual report that measures success against its objectives. In addition, EDGE should report on its progress in the strategies of the Memphis and Shelby County Regional Economic Development Plan which it was crucial in creating in 2014.

* Memphis City Council and Shelby County Board of Commissioners should require EDGE and Greater Memphis Chamber to provide them with a plan to focus less on tax incentives and more on individualized incentives for small and medium-sized businesses, particularly minority-owned ones. Smarter economic development encourages local job creation rather than the redistribution of business tax burdens to small businesses and away from large, often out-of-state, corporations.

* Memphis City Council and Shelby County Board of Commissioners should examine the current matrix used for calculating the amount and term of PILOTs to determine if they agree with the weighting and whether greater emphasis should be on people and salaries than construction and real estate. In doing this, they should consult with the economists in our universities who are routinely ignored in the economic development process while every CEO is treated as an expert in economic growth.

More Public Information For The Public

* Memphis City Council and Shelby County Board of Commissioners should consider whether it should set a baseline amount of taxes that the various boards can approve each year and to approve more, they would have to receive approval by the legislative bodies.

* Memphis City Council and Shelby County Board of Commissioners should commission an independent analysis of the recent Beacon Center of Tennessee report that concluded that EDGE is guilty of gaming its economic impact reports with indirect growth calculations, which produces $65.6 million in lost tax revenues for Memphis and Shelby County. This doesn’t even take into consideration the badly flawed retention PILOT program which means that some huge corporations will never pay their fair share of local property taxes at the same time they benefit from public services and infrastructure.

A core principle of tax incentives is that they should not be given at the expense of economic development factors that are just as important, such as workforce development, quality of life, public transit, and more. The current PILOT programs today drain funding that is needed as investments in other economic development factors that need to be in place for a successful local economy.

There is still time for the serious evaluation that is needed to restore public confidence that every dollar invested in a tax benefit to a large corporation or developer is being wisely spent. There’s no time like the present.